Stableford Capital Insights

Stableford Capital—May 2021 Review: The Rotation Continues

The S&P 500 was up 0.5% in May, virtually unchanged after some intra-month drawdowns on interest rate fears, among other things. Equities continue to hang in, but they don’t have the juice they used to. There are still a few one-off crazy names that go up on hype (see below) but there just isn’t the same euphoric lift and power as we have seen in the past. We see two reasons for this:

1. Millennials living in their parent's basements found something to do other than day-trade meme stocks fed to them by easy-to-trade apps now that Covid restrictions have lifted (Ok, we’re joking here, but it does have an effect on some of the meme-stock, highly shorted low-quality junk stocks).
2. As we outlined last month, interest rates are rising and we’re getting close to peak economic growth so high multiple stocks get their multiples clipped (multiples are simply 1/yields, so as yields increase, multiples decrease).

As a result, we continue to move through a rotation from early cycle equities to more mid-cycle companies. During this period, investors are less likely to chase early-cycle winners, instead of looking for laggards that are likely to do well in a decelerating growth environment (note that is decelerating, not shrinking—things are still going well, just not growing at the rate they were).

Equities Largely Unchanged in May

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Market Commentary May 2021 - Figure 1 Equities Largely Unchanged in May[/caption]

A Note on Fads, Meme Stocks, and Gravity

"2000 zero zero party over oops out of time. So tonight I'm gonna party like it's 1999"—Prince, “1999”

So why the obscure Prince reference? Well, some areas of the equity market just have that 1999 feel to them. Remember 1999? Crazy excess inequities. It was all great, until…2000, and 2001, and 2002 (all negative returns). Now, this isn’t to say that the WHOLE equities market feels like the NASDAQ of 1999. But there are some areas. Let’s take Gamestop and AMC.

Recall Pets.com? Pet supplies sold online with a big marketing campaign and a lot of hype. It started in 1998 and was liquidated by the end of 2000. Mind you, there was a lot of stock sensationalism and hand wringing during that period. But it all worked itself out in the end. Just as the hype-stocks like GME and AMC will.

Along those lines, it is interesting to note how AMC took advantage of the hype last week by raising $600MM in a secondary offering (driving the stock down ~30% that day). Fantastic, shorts buying into an IPO to cover their positions that they haven’t been able to get out of! The management team should do another secondary while they still can, though it will do little to dent the $11BB in debt the company carries on its balance sheet.

Why bring this up? To reiterate that there are always times of hype, overvaluation, story stocks, and the dreaded feeling of missing out. Rest assured, there is no free lunch. Buying good fundamental companies that can compound capital growth and have a sustainable competitive advantage maximizes the upside and limits downside risk. This is the one method that works through time, which is why Stableford sticks with it.

Fixed Income

Rates Largely Unchanged In May

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Market Commentary May 2021 Exhibit 2—Rates Largely Unchanged In May[/caption]

The 10 Yr. U.S. Treasury yield was basically unchanged, falling to 1.60% from 1.62% (Exhibit 2). Rates remain anchored at the short end of the curve buy Fed purchasing, while the long end has become a fight over whether inflation is transitory or not in the press. This all seems to miss the fact that real rates (total rate – inflation rate = real rate), have come in over 27 bps from their high of -0.60 in March (Exhibit 3 ). Perhaps the market is sniffing out a slowdown? Certainly, there will be a deceleration in economic growth in 2H21. Whether than can reaccelerate in 2022 remains to be seen.

Real Rates (Indicator of Economic Growth Expectations) Have Declined

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Market Commentary May 2021 - Exhibit 3—Real Rates (Indicator of Economic Growth Expectations) Have Declined[/caption]Are you interested in making portfolio changes or getting a more in-depth analysis? Contact Stableford today by calling 480.493.2300 or simply request a copy of our Market Blast.SUBSCRIBE TO OUR COMPLIMENTARY STABLEFORD MARKET BLASTThis market commentary was written and produced by Stableford Capital, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.S&P 500 INDEX: The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.